China extends reserve requirements for top banks

BEIJING

Three industry sources told

The required reserve ratio [CAR] for major banks will stand at a record high of 19 per cent and locks up about 180 billion yuan ($35.4 billion) in deposits that the banks would otherwise have had available to lend.

By locking up a chunk of cash, the moves help absorb some of the liquidity that drove inflation last month to a 28-month peak of 5.1 per cent. Inflation data on Saturday showed signs that price pressures are broadening beyond food, raising the prospect that the government will soon roll out more measures to temper the rising costs of living. These may include interest rate increases, currency appreciation and lending restrictions.

The extension of the reserve requirement increase, which was initially ordered in October, acts as a holding measure while Beijing weighs more aggressive policy options.— China’s central bank has told six of the country’s biggest lenders that a special increase in required reserves will be extended, the latest step to try to quell inflation in a campaign that leaders this weekend suggested would be intensified.Reuters that the special increase in reserves that was due to expire this week will be extended for three months. That followed an official reserve requirement increase for all banks — the third in a month — that was announced on Friday.

REUTERS

Higher rates or stronger currencies?

Christopher Howells christopher@mediacorp.com.sg

SINGAPORE — Asian central banks will have to find the balance between raising interest rates and letting their currencies rise next year, analysts say, noting that

the former strategy could put domestic demand at risk

while the latter could crimp competitiveness of exports.

Doing nothing is not much of an option.

Mr David Carbon, head of economic and currency research at DBS Bank, says Asian central banks are behind the curve, with inflation in China running some three times higher than the average rate that has prevailed since the Asian financial crisis in 1997.

In India, the rate is averaging 2.5 times higher than in the same 13-year period.

“More rate hikes and/or currency appreciation is needed in all countries if growth and inflation are to be kept on a steady keel,” said Mr Carbon.

“We saw 21 hikes or currency moves in Asia this year; we expect another 24 in the first two quarters of next year.”

Although more rate increases are expected in Asia next year, currency appreciation may be a preferred strategy for policy makers, analysts say. With most countries in the region pursuing the strategy, there may not be much of an impact on export competitiveness.

[CURRENCY PRICE FIXING  CARTEL    ? ? ? ?]

The pace of appreciation, however, may be tightly controlled by monetary authorities. That is because while stronger currencies do help absorb capital inflows [QE2 & QE3 are WELCOME ?] , if they are allowed to rise too fast and too quickly, they may end up becoming a one-way bet for speculators, inviting even more speculative inflows.

“If you’re facing very large real flows, currency undervaluation and to some extent inflation risks on a headline basis, then allowing for gradual currency appreciation makes sense and I think that’s what will come through - gradual appreciation,” said Mr Craig Chan, executive director of foreign exchange research at Nomura. He added monetary authorities in the region might also resort to “administrative measures” to reduce currency volatility.

According to Nomura, foreign financial investors brought US$372 billion ($587 billion) into Asia in the year ended June 2010, compared with an outflow of US$136 billion in the previous year.

The Japanese brokerage says Asian currencies are as much as 10.7 per cent undervalued at current levels and may gain about 4.5 per cent next year, the same as this year.

MAS widens S$ band: Source

SINGAPORE

This compares with the 2 to 2.5 per cent range that the MAS had allowed before targeting a stronger Singapore dollar in a monetary tightening policy on Oct 14, the source told

“The new bandwidth means the MAS will tolerate a stronger local dollar,” the person said.

####    strOng  S$  wIll  attract  hOt  mOney  intO  sIngapOre  Investments  leadIng  tO  hIgh  dOmestIc  InflatIOn    ####

The source, who declined to be named, did not specify how far the MAS would now allow the US dollar to fall before intervening to curb the Singapore dollar’s strength.

The MAS uses the exchange rate, rather than interest rates, as its main monetary policy tool because foreign trade dwarfs the island’s small domestic economy.

In last month’s semi-annual policy review, the central bank said it was “slightly” widening the band and steepening its slope against a trade-weighted basket of currencies.

The central bank cited “volatility across international financial markets” as a reason for the policy change, which allows the local dollar to strengthen more against the US currency.

The MAS had tightened its policy at its previous meeting in April, when it targeted a “modest and gradual appreciation” for the currency, changing its previous policy of zero appreciation.

The US dollar has been sliding against Asian currencies this year as the region’s strong economic recovery has attracted heavy investment and as loose US monetary policy has prompted investors to seek higher yields in emerging markets.

A number of Asian central banks, including the MAS, have intervened in the currency market this year but the US Federal Reserve’s decision this month to buy US$600 billion ($779 billion) in Treasuries to bolster the US economy has forced Asia to accept further US dollar weakness.

“The MAS believes interventions should only be used in highly disorderly movements,” the source said.

“Otherwise they don’t work because you can’t fight the market. Export-dependent Asian countries must learn to live with stronger currencies.” — The Monetary Authority of Singapore (MAS) will now allow the local currency to move as much as 3.5 per cent against an undisclosed basket of currencies after the central bank widened its trading band, a person familiar with the situation said yesterday.Dow Jones Newswires.DOW JONES

Move to mean that central bank will tolerate stronger local currency

By Joyce Woo (AFP) – 4 days ago

HONG KONG — A Hong Kong Catholic priest has called the city's richest man Li Ka-shing a "devil", weeks after the tycoon made headlines by pledging to give millions to the poor.

Father Thomas Law made the remarks after a weekend Halloween party, saying Hong Kong's property developers -- not spirits -- are the real demons, local media reported.

Law made the remarks in connection with growing criticism that property companies are fudging the size of residential apartment units in the densely populated city of seven million people.

"If Li Ka-shing were to come tonight, that would sure scare the heck out of us," the outspoken priest told reporters after the party.

27 10 2010

Tags: MAS

WRITTEN BY BLOOMBERG

WEDNESDAY, 27 OCTOBER 2010 12:02

Share this  Digg  Del.icio.us  StumbleUpon  Netscape  Yahoo  Technorati  Googlize this  Facebook Export PDF Print E-mail Singapore’s central bank said Asia faces growing risks from capital inflows and called for “close monitoring” by policy makers to avoid a disorderly reversal. The region’s “brighter” economic outlook compared with the rest of the world may result in higher inflationary pressures, the Monetary Authority of Singapore, or MAS, said in a twice-yearly review today. Singapore’s economy, which may hit a “soft patch” in the coming quarters, should keep expanding, it said.   “Inflationary pressures remain significant in Asia,” the central bank said. “Large capital inflows into the region have continued to fuel activities and prices in the asset markets, which could also pose a risk to the inflation outlook.”   Growth in Asia is outpacing the rest of the world, prompting policy makers to raise interest rates ahead of their counterparts in the U.S. and Europe to fight inflation and prevent asset price bubbles. Singapore’s central bank signaled this month it will allow faster gains in its dollar, its main tool to manage inflation, after undertaking a one-time revaluation in April.   “The policy decision was made on the assessment that the level of economic activity would remain high, as the domestic economy would continue to expand, albeit at a slower and more sustainable pace,” the central bank said. “Compared to this year, when the manufacturing sector experienced a sharp surge in activity, gross domestic product growth next year will be driven more by the services sector.”   OVERSEAS DEMAND Singapore has remained vulnerable to fluctuations in overseas demand for manufactured goods even after the government boosted financial services and tourism. The International Monetary Fund this month lowered its 2011 forecast for world growth, citing high unemployment, public debt and fragile banking systems as risks.   “The outlook for Singapore’s key trading partners will remain uneven,” according to the report. “Notably, the advanced economies will continue to face significant hurdles in transiting from public sector-driven to private demand-led growth. While the risk of the developed economies slipping back into recession has generally receded, final demand is likely to remain sluggish.”   The city’s two casino resorts run by Genting Singapore Plc and Las Vegas Sands Corp. have attracted millions to its gaming centers, while employment growth is boosting spending at malls and restaurants. The central bank reiterated the government’s forecast for a 2010 expansion of as much as 15%, and said the $182 billion economy will “grow in line with its potential” in 2011, without providing figures.   CURRENCY GAINS The Singapore dollar has gained more than 8% against the U.S. currency this year. At its April monetary policy review, the central bank said it would shift the local dollar to a stronger range to trade in and sought an appreciation thereafter, the first such combined move in its history.   On Oct. 14, the central bank said it will steepen and widen the currency’s trading band while continuing to seek a “modest and gradual appreciation.”   The Singapore dollar “has fluctuated in the upper half of the exchange-rate policy band” since the April policy review, the monetary authority said in today’s report.   Singapore’s inflation last month accelerated to the highest level since January 2009, rising 3.7% from a year earlier. Consumer price gains are forecast to quicken to about 4% by the end of the year, the central bank said today.   Prices will average between 2.5% and 3% in 2010 and will be between 2% and 3% next year, it said. Inflation may be driven by higher global commodity prices and domestic labor and accommodation costs, the central bank said.   “Given these upside pressures to inflation, MAS deemed it appropriate to tighten monetary policy at this juncture to dampen external inflation as well as to provide the necessary macroeconomic restraint on domestic economic activity, thereby ensuring that cost and price pressures do not become entrenched,” according to the report.

China hides rampant inflation in money binge

Patrick Chovanec

Money, money everywhere. At least that’s what it feels like at the moment in China. Awash in luxury cars, condos and expensive jewellery, the Chinese are enjoying what looks to be an unstoppable boom.Bloomberg

The writer is an associate professor at Tsinghua University’s School of Economics and Management and is an independent fund adviser. The opinions expressed are his own.

>> China’s rate hikesand Singapore B1

Inflation figures due today should give pause to those who assume China’s economy is on sound footing. To an extent few appreciate, China’s astonishing growth rates these past two years have been fuelled by an even more astonishing expansion of its money supply, by more than 50 per cent. Until now, the inflationary consequences have been largely camouflaged in the form of rising asset prices.

High-end property prices in dozens of Chinese cities doubled during the global financial crisis. Sales of gold bars have done the same this year. Fine pieces of jade are selling at US$3,000 ($3,950) an ounce, up 50 per cent in the past couple of months, while packets of certain types of Da Hong Pao tea are going for US$30,000 a kilogramme.

Art and wine auctions in China are pulling in record prices, while the Shanghai stock market surged 8.5 per cent last week to the highest level in almost six months.

Now there are signs that inflation is spilling over into consumer prices. China’s CPI has been climbing steadily all year and Chinese officials are making noises about raising their CPI target to 4 per cent or even higher. Food prices gained 7.5 per cent in August, from a year earlier. Economists estimate wages are rising about 8 per cent. The HSBC Holdings Purchasing Manager Index survey for August reported a marked increase in input cost being passed along in higher output prices.

As inflation comes out from hiding, the authorities may be forced to sharply rein in liquidity, turning China’s cash-fuelled boom into a bust.

If it seems like there’s a lot of money sloshing around the Chinese economy, that’s because there is. Over the past two years, M1 expanded by 56 per cent, M2 by 53 per cent.

Currently, even with much-touted “cooling measures”, both are still growing at an annual rate of about 20 per cent.

Unlike the United States, China never really had a fiscal stimulus, where the government spends its own money directly.

The funding for infrastructure and other projects to juice up the Chinese economy came almost entirely from a boom in lending by the state-run banking system.

Last year, those banks made almost 10 trillion yuan ($2 trillion) in new loans — more than double any previous year — expanding the country’s loan portfolio by a third. This year, they will probably lend 8 trillion yuan, almost twice as much as in 2008.

Where did all that money come from?

It came from Chinese banks being allowed to draw down on their reserves, which opened up a cascade of new lendable funds throughout the entire system. China’s lending boom was, in effect, a massive monetary stimulus, or “quantitative easing”.

The pressure behind this monetary eruption had been building for some time.

For years, China has been running big trade surpluses. To maintain the yuan’s peg to the dollar, its central bank must buy up the excess dollars earned by Chinese exporters, to be stockpiled as foreign exchange reserves, and issue yuan in exchange. Normally, that newly issued yuan would add to China’s domestic money supply and fuel inflation.

To prevent that, the authorities try to “sterilise” the monetary expansion by forcing banks to hold higher levels of reserve deposits and buy special central bank bonds. In short, there was a huge reservoir of liquidity bottled up in China’s banks, just waiting to be let out. The low loan-to-deposit ratio of Chinese banks, often touted as evidence of their financial solidity, is really a product of pent-up inflation.

The main tool used to boost bank reserves was the annual lending quota imposed by the central bank. Since banks could lend up to the quota, but no more, most had no choice but to hold excess reserves beyond their reserve-requirement ratios. Then last year, the lending quota went out the window. Actual reserve ratios fell from 21 per cent to about 17 per cent.

China’s central bank issued more “sterilisation” bonds, but effectively, it stopped sterilising. Trillions of yuan, formerly locked up in bank reserves, flowed into the economy.

The amount of yuan created far exceeds even China’s nominal, stimulus-fuelled gross domestic product growth for the period.

When money is created at a faster rate than real economic growth, the result is inflation.

Yet so far this year, China’s official statistics show consumer inflation at barely over 3 per cent. Those figures have many economists scratching their heads, wondering where the inflation went, while most people in China seem content to believe their country has found a fantastic new formula for prosperity.

In reality, there is rampant inflation in China.

It’s just showing up in asset prices.

The new money that was created entered the economy as loans, mainly to fund investment in fixed assets. When it finally reached consumers, they bought tangibles, like property, instead of spending on consumer goods.

Asset-price inflation is tricky because it doesn’t feel like inflation.

When the price of bread doubles, it feels like it’s getting harder to make ends meet.

When condo prices double, it looks like smart investors are getting rich. But it’s only a matter of time before asset inflation starts working its way through the rest of the economy as broader price inflation — and puts China’s policymakers in a serious bind.

Japan govt says economy at standstill

TOKYO

In a monthly report, the government downgraded its assessment of the economy for the first time since Feb 2009. A senior Japanese official said further pressure on the economy, which is mired in stubborn deflation, could tip it into recession.

“If the economy turns out as expected in our main scenario, we may end up describing the current situation as a soft patch,” said the official at the Cabinet Office, which compiled the report. “But if it comes under further downward pressure, it could end up slipping into recession,” he said.

The government also cut its view on exports and industrial output, saying they were weakening,

which prompted the downgrade of its overall economic assessment.

A rise in the yen to a 15-year high against the dollar added to these woes.

Faltering recoveries from the global financial crisis in developed economies have pushed global investors into emerging markets in search of higher returns, driving up their currencies.

The move has been exacerbated by widespread expectations that the United States Federal Reserve will print billions of dollars to try to lift the US economy, sparking concerns that the extra liquidity will find its way into emerging markets.

Japan’s policymakers had earlier prompted the government to draw up a supplementary budget and the central bank to offer cheap loans and to promise to buy assets.

The government said it wanted the Bank of Japan to support the economy through “appropriate and flexible” monetary policy while the two branches work closely together — phrasing it used when it announced ¥5.05 trillion ($$80 billion) in stimulus spending on Oct 8.

The currency tensions will dominate a Group of 20 finance ministers’ meeting in South Korea starting on Friday and a G20 summit in November, as officials look to tackle the economic imbalances and the threat of competitive currency devaluation.

“Currencies will be the topic that many people will be talking about ... at the G20. I hope that good ideas will be put forward there and we will explain the present situation in Japan,” Finance Minister Yoshihiko Noda said.

Japanese Prime Minister Naoto Kan said yesterday he wants to implement stimulus measures as quickly as possible to support the expansion of the economy. — Japan’s government said yesterday the economy was now at a standstill, highlighting the growing gulf between developed and emerging countries at the heart of global currency tensions.AGENCIES

China raises key rate for the first time since 2007

Bloomberg

BEIJING

The one-year lending rate will increase to 5.56 [+0.25] per cent from 5.31 per cent effective today, the People’s Bank of China said on its website. The deposit rate will increase to 2.5 [+0.25] per cent from 2.25 per cent.

“This is a bucket of cold water for the market,” said Capital Securities analyst Zhang Yuheng in Shanghai.

The tightening would hit both equities and commodities, he said.

The impact was also felt by global markets across the board after the announcement last night. Oil prices fell, stock markets turned negative in Europe and the US dollar rose as investors were caught off guard by the tightening step.

Inflation hit 3.5 per cent in August over a year earlier, above the official annual target of 3 per cent.

Data to be released in Beijing tomorrow may show that September inflation climbed to 3.6 per cent or more even as economic growth moderated, analysts said. — China has unexpectedly raised its benchmark lending and deposit rates for the first time since 2007, ahead of data that may show inflation accelerated to the fastest pace in almost two years.Agencies